Thinking Fast and Slow by Daniel Kahneman

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Don’t tell anybody, but the economist in me is breaking out. I’m starting to get more and more interested in behavioral economics, game theory, and decision theory as I grow into my commercial real estate career.

I have found that the concepts I learn and grow to appreciate in behavioral economics are useful in my every day interactions with deal-makers and colleagues. Learning about how people make decisions and how they make rational choices given the information available is crucial.

Let me see if I can bring it home to commercial real estate. Consider the following questions:

Given the information available to me, should I build this shopping center?

Given the information available to me, should I buy this flex industrial building?

Given the information available to me, should I lease this office space to this prospective tenant?

Given the information available to me, should I refinance my apartment complex with Life Company debt?

Given the information available to me, should I pursue this retailer as a potential lease lead?

Those are just a handful of examples of decisions facing CRE professionals that I would file under behavioral economics, game theory, or decision theory. You can certainly apply the concepts to tenants or clients:

Given the information available to them, how will a tenant want to use this space?

Given the information available to them, what will a shopper want to see in this center?

Given the information available to them, what will visitors to my property want in their parking experience?

Again, just a few examples of behavioral economics in action in our world, and I hope you can see why I find those concepts so relevant. They shape almost everything we do.

That’s why I enjoy books like Thinking Fast and Slow by Daniel Kahneman. To call this a follow up to The Black Swan wouldn’t be fair, but I can say that they are highly related and TFaS quotes tBS fairly often. Black Swan told us how much we suck at predicting anything, particularly “outlier” events. I would say Thinking Fast and Slow is more about our everyday decision-making skills and biases.

In the book, Kahneman discusses two systems of our thinking that he labels System One and System Two. System One is our automatic recall memory, our first impression, our first thoughts and reactions to the world around us. System one isn’t very good with statistics and is prone to mathematical errors and all sorts of biases.

System Two is our more analytical, slow, methodical thinking system that takes the time to analyze probabilities, best practices, likelihood, etc. This is the system we use when we take the time to really break down a problem or decision and analyze it mathematically or systematically. We don’t rely on our impressions or memories of similar problems in System Two. We approach everything more carefully and methodically than we would in System One.

A large section of the book is dedicated to the short-comings and biases of System One and how we, as imperfect decision-makers, rely too heavily on System One for our decisions. Kahneman does a thorough job of breaking down our biases and heuristics when faced with similar situations. He uses questions like: “Would you prefer a 40% chance to win $100 or a 8% chance to win $1000?”

All-in-all the thought processes and common decision biases he examines are though-provoking and interesting, but I would warn you that his style of writing can tend toward academic. He is very skilled in describing complex scenarios at high levels, but tends to use numbers heavily and will stroll through complex psychological issues that the lay reader may not be familiar with.

So, this wouldn’t be an easy beach vacation read that you leisurely peruse between trips to the pool. You need to take your time with Kahneman, take notes, and allow yourself a chance to digest these complex psychological contradictions. I think it’s worth your time to do so, if nothing else you will better understand your own short-comings in quick decision analysis and judgment and may be able to recognize when to slow down your thinking and engage System Two for some heavy lifting.

Thinking Fast and Slow in Two Sentences: Each of us have two systems of thinking: System One (Thinking Fast) and System Two (Thinking Slow). System One is our quick-judgment, memory, and recognition center that is prone to errors in estimation while System Two is our more analytical and statistical system that methodically breaks down options to reach rational conclusions.

Pros: Very interesting foray into psychology that explores decision-making, game theory, and behavioral economics. Well-researched and well-argued.

Cons: A bit length and highly academic/mathematic in parts. Not a leisurely read.

Target Audience: Any reader interested in human psychology, the psychology of decision-making, heuristics, game theory, and behavioral economics.

This book is best for: Someone wanting to analyze and improve the way they make decisions and judgments.